This study examines the effect of directors' and officers' liability (D&O) insurance on the firm’s risk-taking behavior and firm value. We utilize a sample of period in Korea during which the disclosure of D&O insurance information was mandatory and there was a significant cross-sectional variation in the firms’ choice to purchase D&O insurance. We find that D&O insurance leads to a more risk-taking behavior of firms and also increases firm value compared to non-insured firms. We find that increases in risk-taking behavior and firm value are pronounced for firms with greater growth opportunities. These results imply that D&O insurance can be beneficial to firms by mitigating the risk-averseness of managers, particularly for high-growth firms that can benefit more from such change in behavior.
Keywords: Directors’ and officers’ liability insurance, risk-taking, firm value
